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Alexander & Baldwin, Inc. (NYSE:ALEX)

Q4 2012 Earnings Call

February 19, 2013 5:00 p.m. ET

Executives

Stanley Kuriyama - Chairman and CEO

Paul Ito - CFO

Christopher Benjamin - President and COO

David Haverly - Senior Vice President of Leasing

Suzy Hollinger - Director, IR

Analysts

Brendan Maiorana - Wells Fargo

Sheila Mcgrath - Evercore Partners

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Alexander & Baldwin Earnings Conference Call. My name is Ann and I will be your coordinator for today. As a reminder, this conference is being recorded for replay purposes. At this time all participants are in listen-only mode. (Operator Instructions) We will be facilitating a question-and-answer session following the presentation. I will now like to turn the presentation over to your host for today's call, Suzy Hollinger, Director of Investor Relations. Please proceed.

Suzy Hollinger

Thank you, Ann. Aloha and welcome to Alexander & Baldwin's fourth quarter and full year 2012 earnings call. On the call with me today are Stan Kuriyama, A&B's Chairman and CEO; Chris Benjamin, A&B's President and Chief Operating Officer; and Paul Ito, A&B's Chief Financial Officer. Also with us today is David Haverly, A&B Properties' Senior Vice President of Leasing, who will participate in the question-and-answer portion of the call.

Before we commence, please note that statements in this call and presentation that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by the relative forward-looking statements. Factors that could cause actual results to differ materially from those contemplated in the statements include, without limitation, those described on pages 20 to 38 of the information statement filed as Exhibit 99.1 of the company's registration statement on Form-10. These forward-looking statements are not guarantees of future performance and we do not undertake any obligation to update our forward-looking statements.

Management will be referring to non-GAAP financial measures when discussing results for the year. In particular, we will be referring to adjusted net income and diluted earnings per share that exclude the impact of separation expenses and the related non-cash reduction in the carrying values of two mainland development projects. We will also be referring to cash net operating income. Included in the appendix of today's slide presentation, are reconciliations of these GAAP to non-GAAP financial measures and a statement regarding our use of these measures. Slides from this presentation are available for your download at our website, www.alexanderbaldwin.com. Slide three provides an agenda for today's presentation after which we'll take your questions.

We'll start with Stan, who will comment on the results and review 2012 operational highlights.

Stanley Kuriyama

Thank you, everyone for joining us this afternoon. As noted in our earnings release, the company posted earnings in the fourth quarter of $0.20 a share, compared to $0.07 loss for the fourth quarter of 2011. The primary drivers of the improved fourth quarter results were higher development sales and improved leasing results. Agribusiness results, while a positive contributor to earnings, were lower in the quarter due to lower than anticipated sugar production for the year. We also recognized significant tax benefits from our solar farm investment in Kauai, and a Maui land donation.

For the full year, we are on $0.75 a share on an adjusted basis, compared to $0.55 in 2011. Adjusted income excludes separation related costs, such as professional fees and the non-cash impairment of two of our California development properties. Leasing and agribusiness were strong performers in 2012 and we benefitted from a significant lower tax rate as a result of our solar farm and land donation. On slide six through eight, we detail some of the company's achievements in creating shareholder value during 2012 and I will highlight a few of them.

Chief of course among our accomplishments in 2012 was the historic separation of A&B Matson. Shareholder returns from the date of our announcement in December 2011, speak to the positive value created by separation. Operationally, we targeted and were successful in expanding our investment in the urban Honolulu high-rise condominium market. Besides our Waihonua project near the Ala Moana shopping center, we announced a $20 million investment in the ONE Ala Moana project and secured another high-rise site near down town Honolulu.

Pre-sales at Waihonua reflect the strength of this market. To date we have sold 86% of the 340 units available for sale, of which 280 units have been sold under binding contracts. At the ONE Ala Moana project, all of the 205 units available for sale have been sold. 199 units under binding contracts. In July, we sold 286 acres of non-core agricultural land for $29,000 an acre and recently reinvested the proceeds into the purchase of a neighborhood retail center on Oahu.

Commercial property sales were limited in 2012 because our acquisitions have been limited. But we expect to pick up the pace on the acquisition front and will identify the appropriate assets to monetize as the acquisitions accelerate. Overall occupancy in our commercial portfolio was 93%, up 8 percentage points compared to 2011 and we increased our net operating income by 4% over the year. We also made significant progress in reducing our 2013 lease renewal exposure by reducing our portfolio's income exposure from 22% to 11%. On the entitlement front, we secured in June, state reclassification to urban of 545 acres in Central Maui master planned for about 2,500 units. We are now in the process of pursuing county zoning for this project as well as a 600 unit project in South Maui.

2012 was a rebound year for Hawaii's economy especially tourism. Hawaii welcomed 8 million visitors who spent over $14 million, a record year for tourism. And state tourism officials are expecting an even better year for arrivals and expenditures in 2013. The uplift in tourism is extending throughout Hawaii's broader economy. Unemployment dropped to 5.2% in December, a significant improvement from the 6.6% a year ago. Oahu's unemployment rate is even lower at 4.7%. Bankruptcy filings were down 24% in 2012, foreclosures were down 36% and state revenue collections were up by 13%. All positive signs that the economic recovery is beginning to extend to Hawaii consumers.

Construction while not fully recovered, is improving. Construction permits were up 42% in 2012 and construction jobs are projected to post mid-single-digit gains in 2013 and an over 9% increase in 2014. This turnaround in the economy is beginning to be reflected in Oahu's primary housing market. Oahu medium and single-family home prices were up 8% and condominium prices were up 6% in 2012 compared to 2011. Single family home sales volumes were up 7% and condo sales were up 8% for the same period.

Oahu commercial real estate market is also performing well. Retail and industrial vacancies remained below 5% and in fact the industrial vacancy is currently under 4%. Office vacancies have stabilized at about 13%. However, while the beginnings of recovery in the real estate markets are evident on Oahu, the neighbor island markets which typically lag Oahu, remained soft. It will also take continued improvement in the western U.S. economy to materially benefit Hawaii's resort residential market.

I'd like to now ask Chris to update you on our operations.

Christopher Benjamin

Thanks, Stan. To build on some of your comments about the improving market and the activity that we've got going on, I'll pick up on Oahu where we are seeing strong performance in the primary residential product market -- product category, as you mentioned. We are also seeing that strength reflected in the performance of our retail properties on Oahu where we achieved 6% growth in same-store NOI over the course of 2012. The neighbor island real estate markets, as Stan noted, lag in Oahu somewhat, but we are seeing signs of progress and a modest pick-up in sales activity at our various resort development and I'll get into that in more detail in a moment.

Starting with Kukui'ula on slide 13, this shows 2012 sales activity at Kukui'ula. During the fourth quarter we closed three cottage sales at an average price of $2.7 million. For the full year, we sold a parcel, a custom home site, and together with our builder partners we sold six cottages. In total, this was $21 million in sales value excluding any resale activity. And it's important to note that not all of that revenue comes to the partnership, the land portion of it does. But nonetheless, that level of sales activity at Kukui'ula is very encouraging.

In last week, we closed the sale of another custom home lot for $1.1 million. While these sales figures are modest in comparison to the run rate we hope to achieve over the next few years, they are a step in the right direction especially following the virtual sales hiatus we had during the recession. I'm particularly pleased by the two custom home lot sales because we've known for a while that built products would sell, but the return on the custom lot buyer, even in small numbers, is a positive step. The pace of closings and the price points we're achieving show that our marketing and homebuilding initiatives are paying off and they highlight the increasing appeal of the lifestyle that Kukui'ula represents.

At Ka Milo, our joint venture project on the Big Island, we completed and closed eight homes, three of them in the fourth quarter alone. These were a mix of single-family and duplex units and sold for an average price of $1.1 million. And in January 2013 a unit closed at $1.5 million. In 2012, we also closed two developer sales at our Kai Malu condominium project on Maui at an average price of $1.1 million. We're pleased by the gradual return of buyers to resort residential product. Continued progress, as Stan noted, will depend somewhat on the strength of the broader U.S. market which drives the resort segment in Hawaii, but the increase in sales is encouraging.

Turning to slide 15. We are very happy about the ongoing level of sales activity at Waihonua where 291 of 340 available units have been sold to-date and for which we've received nearly $31 million in non-refundable deposits. Construction is progressing well and we expect to deliver units in the first part of 2015. ONE Ala Moana, the Howard Hughes project in which we've made a $20 million investment achieved exceptionally strong pre-sales activity when it was offered in December.

Fueled by the success of Waihonua and ONE Ala Moana, we are accelerating planning for an ocean view high-rise condominium an another urban Honolulu site closer to downtown. As mentioned previously, we've secured the site under a long-term option agreement with Kamehameha Schools and are progressing with design work. We expect to begin marketing this project later this year. Suffice it to say that we remain enthusiastic about the primary residential real estate segments on Oahu but we will approach it cautiously as we assess the depth of the market strength. We'll continue to evaluate other urban Honolulu investment opportunities and we are actively seeking residential and commercial opportunities in Honolulu suburbs as well.

Turning now to our commercial portfolio on slide 17. Overall occupancy for our Hawaiian properties was 92% in the quarter up slightly from 2011. Overall occupancy for our mainland portfolio was 95% for the quarter, 3% higher than the fourth quarter of 2011, driven in part by over 200,000 square feet of office space leased during the quarter in Sacramento, Phoenix and Texas.

On Slide 18, in January 2013 we increased gross leasable area of the Hawaii portfolio with the acquisition of Waianae Mall, a 170,000 square foot retail center in Waianae on Oahu's west shore. The Mall was purchased for $30 million utilizing about $10 million of proceeds from the sale of land on Maui in July 2012 plus the assumption of $20 million existing mortgage. Including the new lease that was negotiated prior to closing and became effective on February 1, the cap rate for Waianae Mall was 7.4%.

Also in January we sold the Northpoint Industrial facility in Fullerton, California for $15 million. Strong buyer demand for industrial properties in Southern California allowed us to achieve a 5.9% cap rate on the fully occupied Northpoint asset. We plan to reinvest the Northpoint proceeds into our Hawaii income producing property via the 1031 exchange process furthering our long-term strategic focus on migrating the portfolio back to Hawaii. We're in escrow for potential replacement properties and have until July to complete the reinvestment.

While Hawaii investment activity in 2012 both for development assets and commercial real estate was relatively modest, I am quite encouraged by the progress we've made in identifying and pursuing assets that we believe provide value creation potential. It's always difficult to predict success in closing transactions but I am optimistic that 2013 will be a good year for a wide range of investments for the company.

And finally, on slide 19, agribusiness performed well for the full year as Stan noted, posting operating profit of $21 million. But fourth quarter results were significantly impacted by lower than expected full year production, which increased the cost of sugar per ton. Fourth quarter results included not only the impact of this higher cost per ton for the sugar sold in the quarter, but also an adjustment for sugar sold in the prior three quarters. This lower production resulted primarily from lower water availability. It's important to note that even though sugar production and sales in the fourth quarter were up versus the prior year, the relevant metric here is actual production relative to our target. And our target and what we have been using to close our books up to the third quarter was higher than what it came in actually in the fourth quarter and so that's why there was the adjustment in the fourth quarter.

Now for 2013, we are forecasting higher levels of sugar production but lower overall prices for the crop compared to 2012. We priced about two-thirds of this year's crop at levels comparable to the past couple of years. But given the drop in sugar prices, the remainder of the crop will be priced at lower levels.

In addition to sugar production and pricing of course, agribusiness operating profit is dependent upon the volume and price at which the company sells power and molasses as well as its cost of operation, all of which can be influenced by many factors. Due to the drop in raw sugar prices and based on our current projections of sugar production and power and molasses sales for 2013, the agribusiness segment 2013 operating profit is expected to be about half of its 2012 level. It's early of course to project this number and we'll provide regular updates as the harvest progresses.

And while you've heard this before, I'm always happy to repeat that in December we placed into service our 6 megawatt solar farm at Port Allen, Kauai. This investment will generate roughly $2 million in annual pre-tax operating cash flow. We've already recovered about 50% or $12 million of our cash investment and we'll recover another 20% or $5 million this year. Full cash paid back will take about five years on this 20-plus year asset.

So with that I'd like to turn it over to Paul to talk about financial matters.

Paul Ito

Thank you, Chris. Slide 20 provides an overview of operating profit by business segment for the quarter. We experienced good results from our leasing segment which was up 12% compared to the fourth quarter of 2011. The increase was due primarily to improved portfolio occupancy and lower expenses. Fourth quarter cash NOI improved 2% to $16 million. The results of our development and sales segment for the fourth quarter of 2012 also improved over 2011 due to the joint venture sales Chris mentioned earlier, as well as the sales of three non-core land parcels on Maui.

In contrast, development and sales results in the fourth quarter of 2011 were impacted by the write-off of our investment in the Waiawa joint venture and other joint venture losses. Agribusiness operating profit was $1 million or $6 million lower than in the fourth quarter of 2011, principally from lower sugar margins Chris discussed, as well as a result of higher cost per ton due to lower than projected full year production.

Consolidated net income for the quarter was just under $9 million or $0.20 per share compared to a loss of $3 million or $0.07 per share in 2011. In addition to the overall increase in operating profit generated by our business segments, net income benefited from lower corporate expenses resulting from a decrease in professional service fees and compensation related expenses, and significant income tax benefits associated with our Port Allen solar farm and a land donation.

For the full year, leasing operating profit was 6% higher than in 2011 principally due to higher occupancy, lower expenses in comparison to 2011, which included costs related to a tenant bankruptcy and the favorable impact from the timing of acquisitions and disposition. Cash NOI was $63 million or 4% higher than 2011. Our development and sales segment results for 2012 were lower than 2011 due to $10 million of non-cash impairment charges related to non-strategic joint venture development projects in California, and lower sales of improved properties in 2012 partially offset by the write-off of the Wailea joint venture in 2011.

Agribusiness operating profit for 2012 was $21 million compared to $22 million in 2011. The decline was primarily related to lower sugar margins resulting from lower production. On slide 23, corporate expenses excluding separation related expenses were $15 million in 2012 compared to $20 million in 2011 due primarily to lower compensation related expenses and professional fees. We expect corporate expenses will increase in 2013 to about $18 million due primarily to expected increases and compensation related expenses. The effective tax rate for the full-year including taxes on discontinued operations was lower 4% due to the Port Allen solar credits and a land donation. We expect that the effective tax rate will normalize to 39% this year.

Slide 24 compares our 2012 and 2011 balance sheets. Our debt-to-debt plus equity ratio remained low at 20% at the end of 2012, but we expect our leverage to increase during the year as we find attractive investments. Our balance sheet remains strong with $340 million of available borrowing capacity at year-end which positions us well to capitalize on new investment opportunities. Cash flow provided by operating activities was $11 million in 2012 comparable to 2011. Excluding development inventory capital expenditures, operating cash flows were $24 million higher than last year due to higher earnings exclusive of the non-cash impairments, lower taxes, lower corporate expenses and lower interest expense.

The bottom of this slide provides a reconciliation of capital expenditures shown on the cash flow statement to total capital expenditure, including amounts invested in joint venture projects and real estate developments. For 2012, our capital expenditures amounted to $112 million which included $57 million of development capital for active real estate projects, joint ventures and investments, $23 million for the Port Allen solar project, and approximately $9 million for 1031 investments with the remainder primarily from maintenance CapEx in our leasing and Ag segments.

Our total capital budget for 2013 is expected to be approximately $140 million excluding 1031 capital. Approximately $81 million of the budget relates to ongoing real estate development including our Maui Business Park II project, the ONE Ala Moana luxury condominium project, Kukui'ula joint ventures, our gateway at Mililani Mauka project and Brydeswood. Approximately $30 million relates to currently unidentified real estate development opportunities and the balance of $29 million primarily relates to maintenance capital for our commercial portfolio and the agribusiness segment. Finally, we've budgeted an additional $60 million for unidentified commercial portfolio acquisitions.

I'll now turn the call over to Stan for closing remarks.

Stanley Kuriyama

Thank you, Paul. Overall, I'm pleased with the company's performance in 2012. Not only did we mark a major milestone and generate significant value for shareholders through the separation of A&B and Matson, a number of other value creating accomplishments were achieved in the year. We will build on 2012 success in the coming year.

In the first month, we've already made progress in expanding our commercial portfolio in Hawaii with the acquisition of the Waianae Mall and we've identified potential Hawaii replacement properties for the Northpoint sales proceeds. All in line with our long-term objective of migrating the commercial portfolio back to Hawaii. We remain positive about the primary residential opportunities on Oahu and hope to identify additional investments this year to expand our exposure to this segment of the marketplace, including another high rise site that we are targeted for pre-sales later this year.

We are also expecting continued solid performance and NOI growth from our commercial portfolio in 2013, and as Chris mentioned, a modest pickup in resort residential sales. The upside potential in resort sales is significant as we are well below levels achieved in this state in prior years. While we expect positive earnings in our Ag segment, earnings will be lower in 2012 due to a variety of factors including lower sugar and power prices. With this backdrop, it is imperative that we continue to build value to our land planning and entitlement efforts by continue to grow our development pipeline and by continuing to locate superior investment opportunities in Hawaii.

That concludes our presentation this afternoon and we'd now be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Brendan Maiorana with Wells Fargo. Please proceed.

Brendan Maiorana - Wells Fargo

Stan or Chris, you guys mentioned a couple of times that the investment pipeline, it seems like it's picking up and you've got a little bit more activity. And it sounds like you are encouraged that you can redeploy the proceeds from the Northpoint sale into some new investments. So I was just hopeful that you could give me a little more color on what the pipeline looks like. Is it predominantly commercial investments and maybe magnitude and likelihood of getting some of these deals done over the next 6 or 12 months?

Christopher Benjamin

Yeah, it's a good question but it's a tough question, also. First of all with respect to the Northpoint reinvestment, the assets that we're looking at for that reinvestment are pretty straight forward income producing assets that would be added to the portfolio. However our acquisition pipeline is a lot bigger than that and it includes everything from raw land which is a favorable zone for commercial development to existing income assets that would really be long-term redevelopment play to potential investments in development joint ventures. And then, of course, again more straightforward commercial real estate assets.

I'd love to talk about probabilities and magnitude because I am enthusiastic about where we are, but I need to show some restraint here just because we are still in due diligence on these acquisitions and anything really can happen. But I would just say that I'd be disappointed if we didn't have relatively active year in terms of acquisitions based on where we are now. I think that we are seeing a lot of good opportunities and doing a good job with what we always say we can do, which is trying to negotiate some off-market deals. And I think we are making headway.

Brendan Maiorana - Wells Fargo

Yeah. I guess, Chris, it sounded like you guys -- I guess you're in escrow on the proceeds that will be redeployed from Northpoint. And is there anything else that's that close or under letter of intent or were you sort of close to the finish line, or is that the main one right now?

Christopher Benjamin

Well, I really think it's hard to – actually, there's more than one asset that could be a reinvestment opportunity for Northpoint. And not all of them are in -- we've got one in escrow, we've got another one in LOI stage, but they'd both be good candidates and so we've got flexibility there. As far as other stuff that's eminent, it's not over till it's over. And again, I'm optimistic and I think we're getting good traction. But you can't even say that just because something is at a PSA stage that it's more likely than something that's in a LOI stage. So there's still work to do.

Brendan Maiorana - Wells Fargo

Sure. And then for the sales process, are you guys marketing assets for sale in anticipation that there will be reinvestment opportunities, or do you think you'll have time if you've got something that's identified and closed, that you then have time to market some assets on the mainland that you'd like to dispose off?

Christopher Benjamin

The general rule is we're going to wait until we have assets identified. I will say though that Northpoint was an example of one that was sort of hybrid, because we had a very attractive offer on Northpoint. And while we had not yet – we were not yet in escrow on a replacement property, we had very high level of confidence that we would get it and so we decided to monetize Northpoint ahead of the acquisition of new property. But that was with a high degree of confidence that we could place the proceeds. We do have a number of assets that I think we could market very quickly but we're going to probably wait to pull the trigger until we lockup the acquisitions.

Brendan Maiorana - Wells Fargo

Okay. Great. And then on the Ag business, so I understand that pricing has gotten a little bit more challenging here. If you strip out the impact of the Port Allen solar which I think still, will go into that line item, for 2013 will go into that segment. And you looked at where sugar pricing is going to be on a spot level, would you be profitable or do you think that number would go negative if you didn't have two-thirds of the prices locked-in at much higher rate if you had to mark everything to market on pricing?

Christopher Benjamin

I think, Brendan, the best way to answer that is that within the sugar business based on the production that we are anticipating for 2013, our breakeven would probably be in the mid-$0.20 range for sugar pricing. And given the spot prices right now, depending on the month, you are looking at a range between the $0.21-$0.22 range up to $0.23-$0.24 range, again depending on the contract month. All things being equal, if we had none of that forward priced we would probably be in a loss situation. But fortunately we do have that price and we still have say 12 to 18 months for the markets to recover before we have to start pricing 2014. Now we could selectively price some 2014 sooner, but we have a lot of time for the markets to recover and so I'm hopeful and relatively optimistic that there will be some recovery in the markets before that time. But if you just stripped it out and looked just at the sugar component that’s where you'd be.

Brendan Maiorana - Wells Fargo

For 2014 do you have -- is there a portion of 2014 that has prices locked in today?

Stanley Kuriyama

The technical answer is, no. We have some ability to swing some pricing between 2013 and 2014 but the simplest way to think about it is that we really haven't priced anything for 2014 and so that remains an opportunity and of course a risk.

Brendan Maiorana - Wells Fargo

Yeah. Sure. Okay. And then this last one and I'll get back in line. But Kukui'ula had a nice pick up in the fourth quarter in terms of sales, is that indicative of sort of the run rate that we can think about now in the fourth quarter or was that just sort of maybe a couple of those deals got done before the end of the year finish line?

Stanley Kuriyama

Well, I guess what I would say is, I'd be disappointed if we didn’t see a year-over-year increase in both number of sales and revenue, at least revenue from the lot sales themselves. So I'm hoping that we will see a pickup and based on the sales activity right now I am expecting that, but it's not going to be, probably, dramatic. But I do hope that if you sort of look at one a month kind of clip, I certainly hope we are at that pace this year and it's a good chance we could be better than that. But the other thing to remember, and we talked about this a little bit last quarter, is that because of issues like percentage of completion and that sort of thing, bottom line is that Kukui'ula is not going to be material driver either way, positive or negative of operating profit this year. It's much more about getting our feet on solid ground and beginning to add to the sales activity so that over the next couple of years as we really ramp up sales, we are showing some earnings from the project.

Operator

(Operator Instructions) And our next question comes from the line of Sheila Mcgrath with Evercore. Please proceed.

Sheila Mcgrath - Evercore Partners

My question on residential, the biggest takeaway I take from the quarter is really some positive momentum there. Just even beyond Kukui'ula, could you talk about going into first quarter here if you've seen continued sales activity across the different projects?

Christopher Benjamin

Yeah, well first of all, Waihonua is an absolute, tremendous success. We are 86% sold on that project about two years before we delivered it. So, there's no doubt that the demand for urban Honolulu residential is very strong. I mentioned earlier the we are going to be careful in evaluating the depth of that market as far as future towers go and future development, but we feel very, very good about that project. And then from there you get into our neighbor island residential product which right now is mostly in the resort category but at different levels of the resort category.

So Kukui'ula is certainly is at the highest and we just talked about that sales progress. But what's really encouraging is that both on the Big Island at Ka Milo and then Maui at Kai Malu, we're seeing a steady pace of sales. At Kai Malu, we have I think Suzy about eight or ten units remaining and those are beginning to sell at levels close to pre-recession levels, which is great news. But more importantly than the margin will generate on that project we have two or three other Wailea residential products that we are ready or almost ready to roll out if the market is there. And so the best news is, that this seems to be indicating that the resort markets are returning on really all the neighbor islands. So that's what I think is most encouraging for us about the Ka Milo and Kai Malu progress.

Sheila Mcgrath - Evercore Partners

Okay. And moving on to Maui Business Park. You've spent some more capital there, I'm just wondering if you could give us some insight on to the level of interest from potential buyers or people that might lease their project at Maui Business Park?

Christopher Benjamin

Yeah, so from the standpoint of smaller usage we had a lot of interest from users early on in taking down parcels and building commercial assets, retailer or industrial assets. That has slowed without a doubt. That's been slower than we expected it to. What we are seeing though is more strength from -- so those are sort of the smaller users, local tenants. But what we are seeing is we are seeing a lot of interest from big-box retailers. And in fact we have an LOI at this point, actually have a PSA with buyer. The end use would be for a big-box retail in (inaudible). This is another one where I am in for all kinds of qualifications out there, because they are still in due diligence and I want to be careful. But that would be a very encouraging sign, something that could potentially happen this year. And we are getting some inquiries from some other big box retailers. So I am disappointed in kind of the lack of depth in the market for the smaller users but I am encouraged by the interest from some of big-box retailers coming into my business park, and of course they are going to be larger parcels and more attractive to us anyway. But I do hope that the sort of lower level small tenant interest comes back.

Sheila Mcgrath - Evercore Partners

Okay. And, Chris, the big box retailers, would they be more likely to buy the land or do you think you could build them a store and lease it?

Christopher Benjamin

I think most likely their typical model in Hawaii is to take down the land.

Sheila Mcgrath - Evercore Partners

Okay. And then just on the taxes, that was a big benefit in the quarter. And you did say I think in the slides that the tax rate would normalize back to 39%. I am just wondering, in first half of the year, do we still see some Port Allen benefit.

Paul Ito

Sheila, this is Paul. No, the benefit for Port Allen from a book perspective will just be reflected or was reflected in 2012. Coming 2013, going forward from a book perspective you'll see the benefit in the form of lower depreciation.

Sheila Mcgrath - Evercore Partners

Okay. Last question, Stan, I just was wondering it sounds like you have pretty good prospects to increase the Hawaii lease portfolio which I think would be positive. Just wondering is there a point where that gets a certain size that you would entertain a dividend or just if you could talk to us about your views on eventually a dividend for Alexander & Baldwin.

Stanley Kuriyama

Right. So, our goal certainly, Sheila, is over time to be able to begin paying a dividend again. But lease portfolio is an important source of recurring income for supporting our operations as well as for supporting our credit facilities. So to the extent, we do are successful in this migration it will, for the most part, principally represent selling off mainland properties and reinvesting those proceeds back to in Hawaii. So while we hope to incrementally grow the portfolio income that way it's not going to be significant. So I don't think that in and of itself would allow us to begin paying a dividend. So as I've mentioned, we're looking at other ways to of course capitalize on the improving local real estate markets, leverage Hawaii's improvement in economy. So, yes, our goal is to get there but I don't think just through the migration of the commercial portfolio that would be sufficient.

Operator

(Operator Instructions) And we have a follow up question from Brendan Maiorana with Wells Fargo. Please proceed.

Brendan Maiorana - Wells Fargo

Paul, I had a question for you. If I'm looking at your capital outlook for '13, it looks like you probably, if you spend I guess what you're planning to, I don’t know, you probably expand the balance sheet by $100 million kind of give or take, sort of net of the retained cash flow. I know you guys have the availability on your credit facility, how do you think you're likely to fund the net new investments that you do for '13?

Paul Ito

Well, we have a $260 million credit facility. At year end I think we had about $5 million drawn on it. So the thought is probably the bulk of the investments we'll make will be put on the revolver. We do of course always evaluate whether we convert some of that floating rate debt to fixed rate depending on the outlook further out in terms of our capital needs. But I would say as a general answer we're looking at the majority put on our revolver.

Brendan Maiorana - Wells Fargo

And what's the rate on the revolver?

Paul Ito

Right now it's about probably in the 2% to 2.5% range.

Brendan Maiorana - Wells Fargo

Okay. And that's the LIBOR plus, whatever, 175 bps or something like that?

Paul Ito

Yes, LIBOR plus the spread, but the spread is based on our debt to total assets calculation. So, yeah, I would say it's probably in the 170, 190 range above LIBOR.

Brendan Maiorana - Wells Fargo

Okay. And then just another question probably for Stan or whomever. It's unknown what's going to happen with sequestration but we're only, I guess, a few days away now from potentially having some of those cuts which could happen, large federal government cuts. And Hawaii is a state that's got a lot of impact from the federal government in terms of its economy overall. Is there any concern that if the sequestration cuts do go into effect on March 1, that there would be a sizable impact to the local economy if those cuts were to stick around for an extended period of time?

Stanley Kuriyama

Yeah, I think so, Brendan. I mean, to the extent that sequestration occurs without any abatement, it would have an impact on the military spending here, looking at potential cuts in personnel as well as in defense contracts. So it would have an impact. It's a little hard to tell what the net impact is going to be. There was for example, a lot of transfers of military personnel and dependence already programmed into the military that was going to occur regardless of sequestration. So I am not sure what the net impact was going to be. And I saw a report for example that defense spending in Hawaii or defense contracts in Hawaii would be reduced by about 10%. And so for us that’s about $250 million and while that's certainly not insignificant, it's not going to make that material difference to the overall economy. What we are hoping of course is that given Hawaii's significance in the Pacific, given the increasing focus from the Atlantic to the Pacific, given what's going on in Korea, that we will always remain of strategic importance to the military and all that will be factored in into the ultimate decisions that are made.

Brendan Maiorana - Wells Fargo

Yeah. I mean if that happens, do you think that there is likely to be a -- do you think there is likely to be a significant impact on your business because I gather most of your resort residential product is probably not directly impacted by that and maybe there's some impact on your commercial lease portfolio. But I would think, overall, that your direct impact to A&B's portfolio would be a little less limited. Is that sort of how you are thinking about it?

Stanley Kuriyama

Yeah. I would say it's going to be limited and indirect because, you are right, eventually the only it impacts us is through the way it percolates through the economy. Right. The broader Hawaii economy and what that does to spending here and then ultimately our commercial properties and the ability of people here to purchase primary housing. So it's going to be attenuated. It would be long term and pretty difficult to predict. But for the most part, our commercial properties are well situated. We wouldn’t expect a material impact there, and as you correctly know, resort residential market probably wouldn't be impacted at all.

Brendan Maiorana - Wells Fargo

Sure. And then just on the condo market in Oahu, so you've got your Waihonua project, you've got the investment in ONE Ala Moana, you've got the KaKaaKo site, that sounds like you are moving forward at an accelerated pace. What's the competitive landscape like for new projects that are likely to pop up over this cycle? And it sounds like you'd like to get another site too, I think if I heard your comments correctly in the prepared remarks. So, sort of what do you think A&B can do and what do you think the market does overall in this cycle for condos.

Christopher Benjamin

Well, Brendan, it's Chris. There is a significant number of potential sites that could go vertical in the next few years within this cycle. Clearly, not all of them will, but the question is who will and what are the various price points and who will be successful. So I think there's something like 13 sites within less than a mile of each other that could go vertical in the next few years. And our key is going to be assessing the, first of all, the appropriate product. For example the KaKaaKo site that we've talk about, the old CompUSA site, figuring out what we can think is the right price point for that location as well as given the competitive landscape, I think Howard Hughes has indicated potentially a couple of new towers going up. There are other projects around the same area that could be going up. What we're trying to do right now is just assess the likely price points of those products and then of course assess the market demand at those price points. But ultimately the only way you can really be confident that you know how a project's going to do is to go for a pre-sale. And we think that the sooner we can get to pre-sales, and of course given the fact that we always try to get at least 50% pre-sales and upwards of 60% plus pre-sales before we begin construction, we'll have a great deal of confidence in our ability to sell the product before we ever go vertical. And so that would be our focus.

Operator

And our next question is a follow-up from Sheila Mcgrath with Evercore. Please proceed.

Sheila Mcgrath - Evercore Partners

Yes, Stan or Chris, I was just wondering if you could talk a little bit about your outlook for construction for the state. It seems that usually the last lever to really get the economy going in Hawaii and I'm just wondering what your view is in 2013 and '14?

Stanley Kuriyama

Sure. Sheila. We actually gave you some statistics there about 2012 performance. There was a significant pickup in building permits issued in 2012. Now, lot of that had to do with residential solar construction and that may not be replicable going forward. But there was a noticeable pickup at 2012 and the local University of Hawaii Economic Research Organization has put out its preliminary projections for 2013 and 2014. And a final report should be issued in about a month. Suzy, is that correct?

Suzy Hollinger

Yeah.

Stanley Kuriyama

So right now they're projecting mid-single digit for 2013 and then a above 9% increase in 2014. So I think the forecast is good and lot of it of course turns on the very projects we've been discussing this afternoon. Right. I mean, Waihonua is under construction, ONE Ala Moana is going start construction sometime this year. I would expect at least another high-rise to start this year. You do see pick-up in suburban primary housing as well. Other projects have been announced on Oahu as well as the neighbor islands. So I think there's cautious optimism on the construction sector. And you're right, for Hawaii to get to that very highest level of economic activity, it does require sort of a full return of the construction sector as well.

Sheila Mcgrath - Evercore Partners

Okay. And one last small question on office. Hawaii office had a little bit of a dip in occupancy. I was just wondering if you could give us the specifics behind that and if you have any new tenant prospects for this space?

David Haverly

Hi Sheila, it's David Haverly. Our Oahu office portfolio did see some rollover at the end of 2012 and we did lose some occupancy. But we are seeing some increased activity in the market going forward. I can't forecast leasing of the space up with any certainty but I do feel good about the activity we are seeing. On the neighbor islands again we are seeing some reduced occupancies too and that will take a little longer as Stan and Chris indicated earlier, until the neighbor island commercial markets pick-up.

Operator

Ladies and gentlemen with no further questions, this concludes today's question and answer session. I would now like to turn the call over to Suzy Hollinger for closing remarks.

Suzy Hollinger

Thanks for being on the call. If you have any additional questions, you can call me at 808-525-8422. Thank you.

Operator

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.

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